Friday, March 19, 2010

Pennies In Front Of The Steamroller

Does the investment proposition to the left look attractive to you? Picking pennies up off the street ahead of an onrushing (OK, oncrawling) steamroller? If the past few years have demonstrated anything, its that while such a strategy can work on occasion, those who get greedy and stay for the last few pennies will eventually get flattened.

It seems as if this year, many (though by no means all) of the more popular profitable trading strategies have involved picking up pennies in front of the proverbial steamroller. The fabled front-end roll-up trade, discussed in this space on several prior occasions, is a prime example.

The more he looks across markets, the more that Macro Man feels that the re-introduction of some sort of risk/term premium into markets is probably overdue. To rely on central banks to cover your hide forever is, ultimately, just asking for a head-on confrontation with the steamroller.

The Swiss, as many FX punters know from bitter experience, are a prime example. It was little more than a year ago that the SNB got stuck into EUR/CHF like a piledriver, engineering a 4% rally in one heady day. And that was basically it. Presumably after some behind-closed-doors yelping from the ECB, the Swiss almost immediately pulled back to a "buy the dips" intervention style which lasted around nine months.

While this wasn't great for big-picture directional guys like your author, it at least provided a platform for range-traders, who could lean on the SNB bid at 1.51....until they couldn't. EUR/CHF has tumbled hard over the past three months since the SNB pulled the bid, turning into a startlingly volatile pair. The (presumably) final nail in the coffin came yesterday evening, when new SNB board member Danthine said that firms should prepare for higher rates and market-determined FX rates. Yowsah!

The December euroswiss contract current prices in 3m LIBOR at 0.63% from year end, up nicely from the current reading of 0.25%. While Macro Man doesn't really think that they'll put rates up over the course of the year, the chart looks perched on the edge of a precipice, having already shed some 20 ticks from the highs.
All of which brings us back to the US. Bloomberg carries a story suggesting that the discount rate could rise again ahead of the next FOMC meeting as part of the (cough, cough) "normalization" process. Meanwhile, it seems as if Macro Man isn't the only one scratching his head and wondering why 3m LIBOR is still hugging the top end of the FF target band. After 5 months of the kind of flatlining that would make PBOC proud, LIBOR has begun to slowly tick higher.
Could that rumbling be the sound of Jake firing up the steamroller? Hmmmm. Macro Man cannot help but observe that the latest rally, in which the financials have participated heartily has a) offered no real threatening price action to challenge weak longs, and b) come in the context of weak volume.
Calling turns is famously difficult, and Macro Man knows better than to try and stand in front of a risk-asset...err....steamroller. That doesn't preclude booking profits on longs however, which to his eye looks like a prudent way to avoid a head-on collision with the steamroller moving the other way.


abee crombie said...

copper is looking top-ish as well

Cornelius said...

This clearly is all because of the Obamacare reform being rammed down our throats by the socialists.

Just kidding.

I'm hesitant to agree with you only because I thought the same thing in July, September and January in various markets. I think we can all easily underestimate the amount of dry powder still out there...

deke said...

the vernal equinox (on 3/20 this year) has been known for spectacular turns in anything that trades...i liked the precise turn from that equinox in 2008 when gold made it's (then) all time high and US dollar hit it's all time low (70.70) and various commodites and stock mkts also turned off the 3/17/08

so here we are with US dollar looking at the 1991 1995 2005 lows in the 81 area, and possible healthcare reform and china tightening on the equinox weekend

Money market fund holdings plunged $73.7 bln to $3.017 bln. The decline has been huge in recent weeks... the sharp decline in money market fund assets is a reason for the Fed to lift rates. The decline may be suggesting yield chasing and could lead to imbalances in the economy


Ivanovich71 said...

I have a distinct feeling that everything changes at month end when the remaining $20B of Banana Ben's asset purchases are over. This market, which everyone has struggled to explain, might just be a "normal" market under QE. We'd never know because it's unprecedented.

My guess is that this draws to a close very soon.

Right Field said...

Today is a Push…Monday Event Risk Significant

The backdrop today for the Equity investor is a lot different than many perceive, most US professionals are focused on expiration and maintaining the positive trajectory into quarter end. Earlier in the week, investors received a uniform message from the Fed, BoE, BoJ that liquidity and growth remains but it is hard to ignore weekend risk of a US DR or China RRR hike and quarter end risk of QE programs ending. Add in Citigroup supply risk and weekend health care passing and Monday is of greater concern. Unlike Equities where expiration rarely provides a true gauge of future direction, the FX position building is a greater read through to risk assets today. Point being, EURCHF highlights the Greece concern, EURJPY highlights risk aversion and EURCAD highlights the continued reserve rotation with dollar parity immanent. Point being, this asset class is trading something different today than higher equity prices. The question I cannot answer is does the cross-asset correlation matter, that bias is no given the recent breakdown having no impact.

Financials - Separately, European Financials are well bid on the back of Lloyds (+10%) . US Financials are the best performing sector YTD and S&P quarterly rebalance is approx 1 billion to buy on today's close. I highlight this because Fannie Mae just updated its forecast to $1.32tt in total residential mortgage fundings for 2010.That is down 33% from 2009's $1.9tt and down 54% from their original 2009 projection of $2.8tt a short year ago. Point being, with trading volume/prop weak and continued deterioration in mortgage earnings, this sector has moved too far and unless this tail risk (global underweight) is factually being removed than this is a good entry to sell strength with Citigroup supply immanent. I like the BKX April 50 puts for .85 as analysts stop being so unusually quiet into quarter end.

Leftback said...

The risk that LB has been watching and waiting for is a breakout to the upside by the USD. A move up towards 83 would definitely have an impact. Metals and miners have not been making new highs, and that's the group LB has been waiting to short. First up off the bottom, first down. The pre-expiration pump n dump is over, at least the pumping part.

Leftback said...

The Bloomberg FOI suit might be an issue for traders?
Freedom of Information

jcambria said...


Here's where I come out. The level of monetary infusion is huge globally. While the US is likely to raise rates I'm not sure that would be taken as a negative by the markets as it also underlies a "stronger" economy.

The ECB and the Japanese are going to add more liquidity or keep rates down for a much longer time.

In sum enjoy the rally.

econobserver said...

Has anyone considered the impact of the healthcare vote on bond yield? Or the market has already priced in such effect?

For me, it looks like that this vote is bond unfriendly no matter what result is.